TRADING TARIFFS – Feature

(editor’s note: not to boast about prescience, it’s interesting to note that this article was written in July…).

With global headlines incessantly screaming out the words “trade war” and “import tariffs” since Donald Trump became President of the United States, it would be fair to fear that World War III is about to break out amidst the killing fields of the boardrooms and policy halls of the globe’s financial markets. Indeed, one could easily say that this war was a long time coming – since the initiation of the Marshall Plan in 1948, which provided assistance to the war-ravaged countries following World War II. The US provided more than $13bn – over ten-times that number in today’s currency value – to rebuild Europe’s economies.

What followed was the US’ economic Golden Age of the 1950s, during which time that nation became the world’s leading economic and political power, launching an ever-growing snowball of debt, as wealthier Americans began devouring more and more resources and consumers began purchasing more and more products and luxuries – all increasingly produced in other economically developing countries. The dollar was growing stronger, making foreign purchases comparatively cheaper (think Japanese transistor radios and pre-Lexus cars) and sinking the shopaholic American public more and more in debt.

The US Owes us Money – Lots of it!

Today, the US owes the rest of the world about $21 trillion – that’s about $64,000 per head… as if each American family home was mortgaged beyond redemption.

But there’s another reason for US debt, and that is the fact that the US Dollar is still the world’s reserve currency. Since the breakdown of the Bretton Woods agreement in 1971, according to which other national currencies were all pegged to gold and the USD, the dollar became the currency by which all others are judged. As a result, the main share of the world’s global reserves is held in US dollars by not-necessarily Americans. It is the currency used for most global transactions; and if the US were to decide to consume less, to ban the use of their currency for global trade and to pay off all their debts, another currency (increasingly potentially – the Yuan) would take its place.

Soon after Henry Kissinger’s Ping-Pong diplomacy, which opened China to the rest of the world, that country was soon accelerating and subsidizing its manufacturing sector and boosting exports. By the turn of the millennium, a $34 billion US trade deficit with China began to mushroom tenfold.

More recently, the US has established Financial Trade Agreements (FTAs) with Korea (KORUS), Asia and the Pacific (the Trans-Pacific Partnership – TPP) and its American neighbors (NAFTA) to the north (Canada) and the south (Mexico…). The US is also a member of the World Trade Organization, which governs international trade, and takes on roles of leadership in most international organizations devoted to trade and governance.

Enter Donald Trump and his ballyhoo to shrink the deficit.

The Boy who Cried WTF

During his 2016 presidential campaign, Donald Trump called TPP a “death blow” to US manufacturing, NAFTA “the worst deal the US has ever signed” and has been making sounds resembling plans to abandon the WTO. Upon being elected, Trump stated that he intends to renegotiate all trade deals in order to make them “fairer” and bring jobs back to the US (which with unemployment in the 4% region for a much longer term than this administration’s, has been showing its lowest rate ever).

Three days after gaining office, Trump withdrew from the TPP, and a year into his presidency, he imposed 2-digit tariffs on solar panels, washing machines, steel and aluminum. China, Canada, Mexico and the European Union retaliated with tariffs of their own; India has expressed its intentions of joining the trend; and Australia has expressed concern over the “consequences of a trade war”. Thus, while his steps are affecting about 4% of US imports, they are also threatening 41% of the nation’s exports!

JP Morgan recently estimated that Trump’s policies have so far cost the economy over a trillion dollars in market value thanks to the 4.5% drop in equities value. They project the damage to global growth to be about 1.4% over the next 2 years – an excellent example of cutting off the head to spite the ear. Recognizing the threat to its own expanding economy, China recently proposed to the EU a united front against the US in return for expanded access to Chinese markets.

The Europeans have so far rejected the proposal for fear of continuing Chinese takeovers of European firms and a lack of conviction that the promise to open markets is sincere. The EU, like the US, has begun scrutinizing foreign investments targeting, primarily, China. However, considering that both Europe and China are comparatively protectionist in nature, they could conceivably arrive at a joint consensus on the US matter quite easily; and make no mistake: by offering to open its markets, China is proving one thing – a trade war could seriously damage its thrust of development.

The Wolf that Cried…

A seemingly positive outcome of Trump’s trade war could end up being unity, of all things. Summing up the words of Crimean poet Bottlesome Abercrombie, “The world works best when united”, the current US president has managed to unite the G7 and the Bric nations – two competing economic blocs by definition – against the US! A definitely adverse outcome is going to be jobs – the exact opposite of what Trump’s stated goal stresses; for the first victim in a trade war is production. As soon as countries begin to limit imports, they stifle manufacturing amongst their partner. And as retaliatory measures are enacted, US exports will certainly diminish, since – at the end of the day – there must be a limit to the amount of locally produced soybeans (the nation’s primary export to China) US residents can consume on their own. Even the much-maligned US automotive industry exports 20% of its products. Lose that and the estimated loss in terms of jobs and income amounts to about $300 billion. A preliminary estimate by the Trade Partnership thinktank mentions 5 jobs lost for every single job saved by Trump’s policies. That translates to roughly 140,000 jobs in the first year alone… and that’s before retaliatory tariffs are taken into account.

The irony of the matter rests in the fact that the US economy’s exposure to external trade is higher than that of any other country it trades with, certainly China’s. And even then, targeting trade seems like a cry in the dark. With a GDP of over $20 trillion, the $450 billion trade deficit is a drop in the ocean. The national debt has little to do with trade and targeting one is not going to influence the other… at least not directly.

Is the Reason Behind the Madness … Madness?

Most economists – even most American economists – are in agreement that Trump’s trade war will cause more harm than joy to the US economy. The question then arises: “Why is he doing it?”

With regard to America’s allies, Trump simply seems to be out for a better deal. The agreements were originally created to transform the relatively less industrialized world into an infrastructure of global production wherein the US could seek out the lowest price for any given product. In the heyday of American paternalism, these deals were struck to help others and – indirectly – to also promote US exports (a certain percent of US aid had to be spent buying US products; thus, for example, military assistance is provided on the proviso that it will be spent buying American fighters and M-16s – suspiciously creating a means of indirectly pumping American tax money into the US defense industry). Now, with these trade partners having caught up and, in many cases, overtaken the US, these products are not necessarily cheaper, but certainly often underwritten by various forms of local subsidy. On the other hand, existing US tariffs are already higher than those of its partners (2.8% versus the EU’s 1.9, for example).

With regard to non-allies, like China, Trump claims that that nation’s growth is thanks to post-Kissinger/Nixon US help, ignoring the profits made by US corporations. These have managed to infiltrate the Chinese bureaucracy, setting up those cheap manufacturing plants that have fuelled the burgeoning of a Chinese middle class of modern-day consumers. On the other hand, they also bemoan Chinese subsidies to home-grown firms, the need to compete with government-owned firms, the central bank’s incessant meddling in monetary policy (devaluing the yuan at will) and, most importantly, the inability of the US government to force the Chinese government’s hand in favour of US corporations – something it seems more successful in doing vis-à-vis US allies, for some reason.

And here we enter upon territory well-trodden by Sun Tzu’s Art of War.

China and Germany – What’s the Difference?

… in a word – Japan!

Clearly, a country that’s too small to pose a threat need not be targeted. Flashback to the 1970s, when Japanese car imports began to threaten the US automobile industry. The result was a set of regulations that aimed to stifle competition by forcing Japanese automakers to comply with US safety standards. Suddenly, everyone was manufacturing huge bumpers that didn’t necessarily make American cars any safer than – say – a Mercedes Benz or Volvo. Within a decade and a half, the Japanese economy was receding and the threat was coming from a more fragmented market.

Today, it’s China, with, not an auto industry, but rather an entire economy that targets economic development and is overseen by a Prime Minister with an LLB in Law and a Doctorate in Economics! Here is a country that is, not merely developing economically, but also increasingly investing around the globe, acquiring companies and countries, and threateningly on a collision course with that other imperialistically inclined economy – the American one!